Enhabit, Inc.EHABNYSE
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Operator: Thank you for standing by. My name is Kathleen, and I will be your conference operator today. At this time, I would like to welcome everyone to the Enhabit Inc. Third Quarter 2025 Earnings Call. [Operator Instructions] I would now like to turn the call over to Bob Okunski, Vice President of Investor Relations. Please go ahead.
Bob Okunski: Thank you, operator, and good morning, everyone. Thank you for joining our call today. With me on the call this morning is Barb Jacobsmeyer, President and Chief Executive Officer; and Ryan Solomon, Chief Financial Officer. Before we begin, I want to let you know that our third quarter earnings release and supplemental information are available on our website at investors.ehab.com. Additionally, we have filed a related 8-K with the SEC, and that is also available in the same location. On Page 2 of the supplemental information, you will find the safe harbor statements, which are also set forth in the last page of our earnings release. During the call, we will make forward-looking statements, which are subject to various risks and uncertainties, many of which are beyond our control. Certain risks and uncertainties that could cause actual results to differ materially from our projections, estimates and expectations are discussed in our SEC filings, including our annual report on Form 10-K, which is available on our website. We encourage you to read these documents. You are also cautioned not to place undue reliance on the estimates, projections, guidance and other forward-looking information presented, which are based on current estimates of future events and speak only as of today. We do not undertake a duty to update these forward-looking statements. Our supplemental information and discussion on this call will include certain non-GAAP financial measures. For such measures, reconciliation to the most directly comparable GAAP measure is available at the end of the supplemental information as well as our earnings release. With that, I'd like to turn the call over to Barb. Barb?
Barbara Jacobsmeyer: Good morning, and thanks for joining us. Let me start by recognizing the exceptional Enhabit team. We're proud to share that Enhabit has been named as one of Fortune's Best Places to Work in health care. This recognition is a powerful testament to our commitment to a culture of excellence, strong leadership and an outstanding employee experience. It's that same team that has delivered another quarter of strong performance for our patients, partners and shareholders. I will address the 2026 CMS home health rule before Q&A. But first, Ryan and I will review the quarter results. Home health total admissions were up 3.6% year-over-year, with census increasing 3.7%. Normalized for closed branches, our admission growth was 4.3% year-over-year. Fee-for-service Medicare census continues to stabilize with census down 1.4% year-over-year versus the 14.1% year-over-year decline experienced in quarter 3 2024. Our non-Medicare admissions were up 10.4% and an appropriately managed payer mix resulted in a 2.8% increase in non-Medicare revenue per visit year-over-year. As mentioned on our last earnings call, we experienced disruption at the end of the second quarter, early third quarter in both admissions and census from the impact of renegotiations with a national payer that ultimately resulted in achieving a low double-digit increase in our per visit rate effective August 15, 2025. By late September, we have recovered our census with this payer and recent admissions are now at 120% of our weekly average. Our total patient census grew sequentially each month of the third quarter, and that sequential growth persisted into October. Our scale drives meaningful access to payer members and that access, coupled with our high-quality outcomes, continues to position us well for progress within our payer strategy. This was evidenced by another renegotiated national payer contract during the third quarter. This was the renegotiation of one of our first payer innovation agreements, and this one did not require disruption to patient access or to our census and resulted in achieving a successful update in our rates effective in November. The positive impact of our payer innovation team is ongoing as we continue to work with new and current payers on pricing that appropriately values our timely access to care as a scaled provider with strong outcomes. Our quality of care and our timely access are also part of our hospice strategy, and these strategies continue to drive strong results. We have now experienced 7 straight quarters of sequential census growth. Total admissions grew 1.4% year-over-year. Normalized for closed branches, admissions were up 3%. Census grew 12.6%. We have added 21 or 11% additional direct sales team members year-over-year to continue to broaden our reach to additional referral sources. We have the clinical capacity for growth and will increase our reach to diversify our referral sources. To complement our organic growth strategy, our de novo strategy is positively impacting total growth. In quarter 3, we opened 2 de novos for a total year-to-date of 6. We opened our seventh location in October and continue to be on pace for a total of 10 de novos in 2025. As evidenced by our organic and de novo focus, our admissions and census growth are a big part of our strategy. However, whether it is CMS pricing or continued shift to Medicare Advantage, we must be as efficient as possible to have necessary resources to strategically invest in people and technology. Therefore, our cost structure is critical to future success. As mentioned before, we believe advanced visit per episode management is a promising lever to mitigate uncontrollable and unanticipated rate disruptions like these. Our advanced visit per episode management pilot was initiated in mid-August in 11 branches. However, because a pilot case must start with a new start of care, the branch's full census was not impacted until the end of October. Early results are promising with a decline in total visits per episode in these locations from approximately 15 prior to the onset of the pilot to approximately 13 currently. 83 additional branches were rolled out throughout the month of October, and the rest are expected by the end of November. We anticipate adding 10 resources between our authorization team and our virtual clinical team to support the full company rollout. We will provide an additional update on our fourth quarter earnings call. As we navigate a dynamic operating environment, we remain confident that Enhabit is best positioned in the industry with our experienced leaders, high-performing teams and innovative technology to manage through challenges and continue growing market share. And now I will turn it over to Ryan, who will cover the financial results of quarter 3 and additional updates on our G&A cost management focused efforts.
Ryan Solomon: Thank you, Barb. Continued strong execution in the quarter on our broader strategy delivered strong consolidated financial performance with both top line and bottom line EBITDA growth to the prior year in Q3, all while continuing to generate consistent free cash flow that we've used to improve our net leverage to levels not seen since late 2022 just following our spin. Our ability to deliver growth and profitability for the third straight quarter in what remains a challenging operating environment highlights the consistency in our operational execution and flexibility in our model. Even as payer disruptions created headwinds early in the quarter, our teams navigated the challenges effectively, ensuring that we built momentum throughout the quarter to deliver growth and position us well as we enter Q4 to finish the year strong. Before reviewing consolidated and segment detailed performance, a few Q3 highlights that demonstrate clear execution on our strategy include the following: Returning the business to consistent growth in 2025 was a strategic priority, and we are well on our way. With Q3 results, we have now delivered several quarters of year-over-year growth in both revenues and adjusted EBITDA. Improving the financial health of the business has been a focus in 2025 as well. With a return to consistent adjusted EBITDA growth, we have used the improved adjusted free cash flow to reduce our net debt to adjusted EBITDA leverage amount to 3.9x in Q3 2025, lower by over 1.5 turns compared to Q4 2023 when leverage was 5.4x. The improved leverage lowers our Q3 2025 annualized cash interest expense by approximately $19 million compared to Q4 2023. Improving the financial health of the business provides us with improved liquidity and an overall balance sheet flexibility for innovation and potential M&A. Hospice segment momentum continues to be very strong, delivering record revenues and profitability in the quarter with year-over-year segment adjusted EBITDA growth of over 70%, with substantial margin expansion on double-digit census volume growth of over 12%, driving overall revenue growth of 20% in Q3. Home Health successfully launched the visits per episode pilot in Q3, while delivering census growth of 3.7% to the prior year despite payer disruption early in the quarter, along with continued execution on stabilizing Medicare volumes and improving home health per patient day unit cost economics, which were lower by 2.1% in Q3 versus the prior year. Home office expenses improved $2.3 million sequentially, coming in at 9.1% of revenues in Q3 versus 9.9% of revenues in the prior quarter, as we focused on cost management initiatives, which lowered Q3 and run rate costs as we implement mitigation strategies in front of any potential CMS final rate rule headwind. Now shifting to the Q3 consolidated results details. Consolidated net revenue totaled $263.6 million, an increase versus prior year of $10 million or 3.9%. Consolidated revenue growth in the prior year was driven primarily by outsized growth in our Hospice segment with revenue growth of 20% on both census and unit revenue growth. Home Health revenue was relatively flat to prior year on census growth, offset by lower unit revenues related primarily to mix. Consolidated revenue growth in the quarter translated to improved profitability, both to prior year and sequentially, with consolidated adjusted EBITDA of $27 million in the quarter, an increase sequentially of $0.1 million or 0.4%, while growing to the prior year by $2.5 million or 10.2%, with overall adjusted EBITDA margin as a percent of revenue expanding to 10.2%, an increase of 50 basis points to the prior year. Now shifting to Home Health performance. Revenue was $200.5 million, lower than prior year by $0.5 million or 0.2%. We estimate that without the payer renegotiation disruption experienced early in Q3 and the loss of revenue from branch closures, the home health total revenues for the quarter would have been approximately $3 million higher, which would have resulted in growth to the prior year of approximately 1% in the quarter to prior year. Average daily census for the quarter totaled 41,451, growth to the prior year of 3.7%, while lower sequentially 1.6%, primarily related to the payer renegotiation disruption early in the quarter. While we were successful in replacing disrupted payer volumes early in the quarter and then building back volumes throughout Q3 post renegotiation, this did put incremental pressure on our unit revenue per patient day in the quarter, which was lower sequentially 2% and versus prior year by 3.7%. The lower unit revenues were partially offset by improved unit cost per patient day for the prior year of 2.1% as we maintained staffing productivity improvements in the quarter to offset typical incremental wage inflation costs. Home Health adjusted EBITDA totaled $33.9 million in Q3, reflecting a decrease to the prior year of $2.6 million or 7.1% and sequentially $5.4 million or 13.7%. The lower adjusted EBITDA sequentially reflects margin compression as unit revenues were lower 2% and unit costs were marginally higher by 0.7% on lower average daily census volumes of 1.6%, which created gross margin compression of 160 basis points. We saw this margin compression normalize late in the quarter as we built back volumes following the payer disruption. Two key items to highlight in Home Health outside of the broader revenue and adjusted EBITDA performance include the following: as Barb touched on, we continue to have success in slowing the rate of decline in our Medicare patient volumes, with Medicare revenue mix totaling 56.5% of total Home Health segment revenues, improvement sequentially of 20 basis points. In regards to the continued visits per episode optimization, our total visits per episode for Q3 of 13.4 is lower 0.3 visits sequentially and 0.7 visits versus prior year. A host of efforts in the quarter focused on providing the clinically appropriate number of visits to our patients, combined with successfully launching our pilot as previously outlined on our Q2 call in a small subset of branches with early results being promising, gives us confidence in our ability to use visits per episode as a key lever to continue to optimize while balancing quality to meaningfully offset potential rate reimbursement headwinds from CMS 2026 proposed home health rule. Now shifting to our Hospice segment performance for Q3, where continued execution by our Hospice leaders delivered a record performance for the quarter with revenue totaling $63.1 million, reflecting sequential growth of $2.9 million or 4.8% and exceptionally strong growth to the prior year of $10.5 million or 20%. Revenue growth was supported by continued strong momentum in census growth in the quarter of 3.2% sequentially and 12.6% to the prior year. Hospice adjusted EBITDA totaled $17.2 million in Q3, reflecting an increase to the prior year of $7.2 million or 72% on a double-digit volume increase combined with margin expansion as adjusted EBITDA margin as a percent of revenue improved 830 basis points to the prior year and totaling 27.3% as our operational leaders continue to create operating leverage on the increased volumes. Two key items to highlight in Hospice outside of broader revenue and adjusted EBITDA performance include the following: all of our 2024 hospice de novos are profitable and collectively generated $0.8 million of revenue and $0.3 million of EBITDA in Q3, demonstrating the ability to quickly ramp our de novo sites to profitability. Average discharge length of stay continues to remain relatively flat with Q3 coming in at 101 days versus the prior year of 100 days. Shifting briefly to our home office, general and administrative expenses for the quarter, which totaled $24.1 million or 9.1% of revenues in Q3 compared to $26.4 million or 9.9% of revenues in the prior quarter, delivering a sequential improvement of $2.3 million. This improvement primarily reflects the result of a focused G&A cost review completed in the quarter that generated savings in Q3. We saw an increase to prior year, primarily related to incentive accrual release in the prior year not replicated in Q3 and broader inflation, somewhat offset by cost initiative actions in 2025. Transitioning now to the balance sheet and cash flow. As outlined earlier, a key strategic priority in 2025 is using free cash flow to continue to delever our balance sheet. Adjusted free cash flow year-to-date totaled $64.8 million, which when normalized for 1 less payroll period in the quarter that we will see in Q4 would total approximately $45 million or an approximate 56% adjusted free cash flow conversion rate, which compares favorably to the full year 2024 by over 200 basis points. During the quarter, we reduced overall bank debt by $15.5 million, including amortization and prepayments. We ended the quarter with approximately $57 million in cash and available liquidity of $143.3 million compared to available liquidity in the Q3 period of the prior year of $94.1 million, an improvement of $49.2 million. Improved profitability, coupled with continued balance sheet improvements result in a net debt to adjusted EBITDA leverage ratio of 3.9x compared to Q3 of the prior year of 4.8x. Progress on reducing our overall bank debt continued in Q4 with us having already made an additional $10 million of debt prepayments quarter-to-date through October, which brings our total debt reduction to $100 million since Q4 of 2023 as summarized on our supplemental slides. We remain committed to strengthening our balance sheet and improving profitability. Let's conclude with briefly discussing updated guidance. Based on our consolidated year-to-date 2025 results and the momentum in the business, we remain confident in our strategy and full year outlook. We've updated our full year guidance as follows. We now expect full year revenue to be in the range of $1.058 billion to $1.063 billion. We are increasing our full year adjusted EBITDA guidance to be in a range of $106 million to $109 million. We are also increasing our full year adjusted free cash flow to be in the range of $53 million to $61 million. Thank you for the time today. I'll hand it back over to Barb for a few closing comments on the CMS rate rule before we open up for questions.
Barbara Jacobsmeyer: Thanks, Ryan. As you're aware, the CMS 2026 home health final rule has not yet been published. We remain focused on our strategies to mitigate as much of the pricing headwind as possible in 2026 and are well on our way with the various strategies we have already deployed. More details will be forthcoming when we report full year 2025 earnings and 2026 guidance during Q1 of next year. As we noted in our comment letter, the proposed cuts, if finalized, will worsen the existing trend of reduced patient access to home health care. Home health is the patient preferred and most cost-effective post-acute care option and thus saves Medicare money. We urge CMS to reverse the temporary and permanent adjustments contained in the proposed rule to ensure adequate access to home health is restored. Operator, we can now open the line for questions.
Operator: [Operator Instructions] And your first question comes from the line of Brian Tanquilut of Jefferies.
Meghan Holtz: This is Meghan Holtz on for Brian Tanquilut. It's nice to hear some -- you guys had some additional payer negotiations that came out favorable for you guys. So can you kind of provide some color on the rate increase you received from that new one in November and then the pipeline of any additional payer innovation contracts that you have upcoming for renewal?
Barbara Jacobsmeyer: Sure. So as I mentioned, this was our first payer innovation contract, national one that came up for renewal. So we were pleased with the update. Because it's already a payer innovation, we really won't disclose the update that we received. But I will say that we continue to work with those that we had negotiated. More of the regional type agreements will be coming up in the next year. The future national agreements, it will be more towards the end of next year, early 2027 before the additional national agreements will come up.
Meghan Holtz: Okay. And then just a quick follow-up. You guys had nice improvement in the G&A line. Can you provide some color where that expense reduction is coming from? And then how much more runway do you have to reduce and remove some costs in that line?
Ryan Solomon: Thanks, Meghan. Yes, so as we think about G&A, when we think about home office, more traditional back-office capabilities in the context of both internal and external related expenses. So a combination of some headcount reductions as well as some efficiencies that we're able to really in-source capabilities from third-party vendors while not impacting any of our capability. When you think about in the quarter, roughly $1 million to $1.5 million of that overall kind of G&A improvement sequentially, we think is durable and kind of how we think about things prospectively going forward.
Operator: And your next question comes from the line of Ryan Langston of TD Cowen.
Christian Borgmeyer: This is Christian Borgmeyer on for Ryan Langston. Last year, we saw a pretty big jump in hospice average length of stay sequentially from 3Q to 4Q. Should we expect a similar tailwind sequentially this year just as a product of seasonality? I'm just curious what seasonal factors drive that as we get to the end of the year.
Barbara Jacobsmeyer: Yes, it's difficult because, obviously, last year, when you look, we're going to have some pretty big comps here both in Q3 and Q4. And so as you mentioned, there usually is some seasonality. It's why we've added some additional resources to make sure we can extend the outreach that we have. I would say that the holiday times tend to be a little bumpy within this segment. You do have folks that tend to want to wait to elect until after the holiday. So it's -- I would say it tends to be one of our more unpredictable times of year, especially as we go into the 2 upcoming holidays.
Christian Borgmeyer: Got it. And then just one quick one on the payer innovation contract renegotiation. How long is re-contracting cycle typically? Is it annually? Or is it more contract by contract?
Barbara Jacobsmeyer: Yes. It's by contract by contract. I would say the majority of our contracts are 3 year. We do have some that are 2 years, but I would say the majority tend to be around a 3-year time frame.
Operator: [Operator Instructions] And we have a follow-up question from Brian Tanquilut of Jefferies.
Meghan Holtz: As long as there's no other queues, I'll ask another follow-up. Can you guys just kind of speak to labor in the quarter, specifically if you guys continue to benefit from some of the peers that you saw changing pay structure and you're able to capture some labor there? And then how are you thinking about wage inflation in '26, if you could give some preliminary color there?
Barbara Jacobsmeyer: Sure. So I would say we've seen a nice uptick continued in our applicant pool for nursing and for therapy. And so that has been nice to see. We've continued to see an uptick also in our headcount on the clinical capacity for Home Health and for Hospice. So are pleased with the results that we're seeing there. And then as it relates to wage, I would say, we're kind of, I would say, back to that normal merit around that 3% is what we're experiencing. There are markets that will pop up occasionally that are more challenging. We do handle those more at a market level. I would say we're seeing a little bit more of that right now in the therapy side of things, but we monitor that at a market level.
Operator: And there are no further questions. I will now turn the conference back over to Bob Okunski for closing remarks.
Bob Okunski: Thank you, everyone, for joining today's call. Please feel free to reach out if you have any additional questions. Thank you for your time.
Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.